Surging stock markets help Royal & Sun soar back into blue-chip index

Royal & SunAlliance, the insurance giant, is set to make a triumphant return to the FTSE 100 this week, reflecting the dramatic stock market rebound since the last quarterly reshuffle of the index.

RSA is likely to be joined in the index of the UK's 100 leading shares by Rolls-Royce, with the pair replacing Hays, the support services group which is breaking itself up, and Mitchells & Butlers, the pubs half of the demerged Six Continents.

UK shares have risen in value by around a quarter since the last time the index was reshuffled in March, but RSA has soared 150 per cent. The stock market rebound has helped ease the problems across the group, whose assets had declined in value to such an extent that RSA needed to raise capital of £700m if it was to take on any new business this year. The group recently raised £540m from selling its Australian life insurance business.

The engine maker Rolls-Royce, which has often attracted criticism for off-balance sheet liabilities, has seen its shares double over the past three months as investors reassessed the risks involved.

Darren Winder, strategist at UBS Warburg, believes there is scope for UK shares to continue to rise over the coming months, now that economic optimism - and in particular a perceived reduction in the threat of deflation - means investors believe shares are less risky across the board. In a note to clients, Mr Winder said: "Assuming that [central bank and government] efforts to maintain a positive, moderate rate of inflation succeed, then we believe risk premiums can be expected to fall further, contributing to a sustained recovery in equity returns."

The index changes will be decided by FTSE on Wednesday, on the basis of market capitalisations at the end of trading on Tuesday. If the situation remains the same as at the close of play last Friday, Hays and Mitchells & Butlers will be demoted to mid-cap status, although GKN, the car parts and helicopters manufacturer, and Capita, which runs London's congestion charging scheme, are both still at risk.